How Will the 2018 Tax Changes Affect You?

How Will the 2018 Tax Changes Affect You?

As I’m sure most are aware by now, 2018 is bringing with it some new, big tax changes. But what exactly does that mean for you? While some regulations are still “in the works,” we have highlighted ten changes that are most likely to affect you this year:

1) Individual Tax Rates:

Most will see a decrease in their marginal tax rate in 2018. For example, if your taxable income was $315,000 in 2017 (MFJ), you were in the 33% bracket. In 2018, you would be in the 24% bracket. Big difference!

2) The Standard Deduction:

In an attempt to simplify filing for taxpayers, the standard deduction was increased ($12,000 for single, $24,000 for married filing joint), and personal exemptions repealed. These changes will result in fewer taxpayers being able to itemize deductions.. thereby “simplifying” their taxes.

3) The $10,000 “SALT” (State And Local Tax) Deduction:

Individual state, local, sales & property tax deductions will now be capped at a combined $10,000. You may have heard about taxpayers lining up to try and pre-pay property taxes for 2018 in 2017 – and this is why. If you pay more than $10,000 in combined state & local income taxes in 2018, you essentially receive no additional deduction/benefit for any property taxes paid.

4) Miscellaneous Itemized Deductions

Those subject to the 2% AGI limitation are being suspended. You may no longer itemize expenses such as unreimbursed employee business expenses (including the home office deduction), tax prep fees, investment advisor fees, etc.

5) Child Tax Credit:

This credit is being increased from $1,000 to $2,000 for each qualifying child under age 17. More importantly, though, the income phase out limits for the credit have been increased significantly: $200,000 for individuals (up from $75,000) and $400,000 for married filing joint (up from $110,000). There is also a new $500 credit for non-qualifying children such as those over age 17, elderly parents being cared for, etc. This credit is subject to the same income limitations (phased out at $200k Indiv/$400k MFJ).

6) Mortgage Interest:

The mortgage interest deduction has been decreased for NEW debts (taken out after December 15, 2017). You may now only deduct interest on the first $750,000 of your mortgage debt instead of the previous $1M. Also, the deduction for home equity indebtedness has been eliminated. Previously, you were able to deduct interest for up to $100,000 in home equity debt – this will no longer be allowed. Unlike the mortgage debt interest, this also applies to existing home equity debt – no existing debts are grandfathered.

7) Business Taxation:

    Corporations (and PSC’s) are being taxed at a new, flat rate of 21% – a huge decrease!

    Pass through businesses (LLC, Sole Proprietorship, S Corp) are allowed a new below-the-line deduction: the Qualified Business Income (QBI) deduction. QBI is essentially the net income of the business (not including any investment income), and eligibility may be subject to income & other limitations depending on the type of business. Generally, they may deduct 20% of their QBI. This introduces some new planning issues/items for consideration. Specifically:

      – Employees will be incentivized to shift toward an independent contractor set-up to take advantage of the QBI deduction
      – Those in service businesses who are above the income limits for the QBI deduction might consider filing as a C Corp (QBI deduction fully phased out at $207,500 for individual and $415,000 for married filing joint)

    8) 529 College Accounts:

    Previously, 529s could not be used for pre-college expenses. The new law allows for a tax-free, qualified distribution of up to $10,000/year for elementary & secondary school expenses.

    9) AMT (Alternative Minimum Tax):

    AMT was retained but the exemption amount has been increased to $70,300 for single/HOH and $109,400. Further, the phase-out of exemption increased to $500,000 for single/HOH and $1M for MFJ. The combination of the increased AMT exemption and phaseouts plus the limited itemized deductions will make it less likely for individuals to trigger the AMT tax.

    10) Alimony:

    For agreements dated December 31, 2018 or later, alimony is no longer included as income for the recipient, and no longer allowable as a deduction for the individual paying.

These changes will affect taxpayers differently – there is not a “one size fits all” strategy. If you’re curious about learning more or finding out how this might affect you, please reach out to us! We’re happy to review your individual situation and help you navigate 2018.

You can see the full text of the new legislation here and the summary notes here.

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Save More for Retirement – Contribution Limits Increased for 2018!

Save More for Retirement – Contribution Limits Increased for 2018!

The IRS has announced that they are increasing annual contribution limits for 2018 – for those of you maxing out your retirement plans and/or HSAs – this is especially important for you!

Retirement Accounts

The annual contribution limit for 401k, 403b, 457 (most), & TSP plans has increased from $18,000 up to $18,500. If you’re age 50 or older at any time during the year, you can also make additional catch-up contributions up to $6,000 (no change to this amount) for a maximum annual contribution of $24,500.

Health Savings Accounts

For those enrolled in a medical plan that allows for HSA contributions, these limits have increased for 2018 as well. The annual HSA contribution limit for a family plan is now $6,900 – up from $6,750. For individuals, the contribution limit is now $3,450 – up from $3,400.

IRAs

The annual maximum for IRA’s and Roth IRA’s did not change – those remain at $5,500 (plus $1,000 catch up for those age 50 and older). However, the income levels used for determining eligibility for contributions have increased. The new income phase-out ranges for deductible IRA contributions are:
Single taxpayer covered by work retirement plan: $63,000 – $73,000
Married filing jointly where the IRA contributor is covered by work plan: $101,000 – $121,000
Married filing jointly where the IRA contributor is NOT covered by a work plan, but their spouse is: $189,000 – $199,000

And the new phase-out ranges for Roth IRA contributions are:
Single & Head of Household: $120,000 – $135,000
Married filing Jointly: $189,000 – $199,000

Take Action!

For those planning on maxing out these plans, now is the time to make adjustments to get on pace to max these out for the 2018 calendar year. Let us know how we can help!

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Mega-Deduct and Convert: Save Thousands On Roth IRA Contributions

Mega-Deduct and Convert: Save Thousands On Roth IRA Contributions

This article from the Finance Buff explains a great way to save hundreds on Roth IRA contributions.

But I wanted to expand upon this idea and highlight an even bigger way to save using a similar strategy. Thanks to changes in tax law, the “deduct and convert” strategy has become much more beneficial. Before you read on, if you’re pre-retirement age, you must reside in Illinois or Kentucky for it to work well. For all Kentucky and Illinois residents, pay close attention!

The Original Strategy

This strategy exists thanks to Kentucky and Illinois favorable IRA rules. Both states allow state income tax deductions on IRA distributions (including Roth conversions) up to state specific limits. They also allow state income tax deductions on qualified Traditional IRA contributions.

The strategy involves contributing to a traditional IRA, taking the tax deduction (assuming you qualify), and then converting it to a Roth IRA. Kentucky has a progressive state income tax which ranges from 2% to 6%. Most people are paying closer to the top.

For example, in Kentucky if you contribute to an IRA and qualify for the deduction, you’re able to deduct the contribution for state income taxes. So no state income tax going in. You’re also able to convert Traditional IRA’s to Roth (aka Roth conversion) at any age and avoid Kentucky income tax on the converted amount. So no state income tax on a conversion to a Roth IRA.

By taking the extra step, you avoid state income tax on the Roth IRA contribution. For someone in the top KY tax bracket, this strategy effectively saves them 6% on the contribution amount when compared to contributing directly to a Roth IRA. For a $5,500 contribution, that’s $330 in tax savings. With two IRA’s maxed out at $11,000, the max household benefit would be $660.

Although $660 is better than a poke in the eye, it may not be worth the hassle to many taxpayers. And most don’t even qualify in the first place because they don’t live in Kentucky or Illinois and/or cannot deduct IRA’s. We’re talking about a small benefit for a small group.

However, since the article was written, new laws now allow 401k’s to offer in-plan Roth conversion. This effectively opens up the strategy to 401k participants and raises the stakes with much higher contribution limits!

Mega-Deduct And Convert

Greg and Jane live in Kentucky and plan to maximize Roth 401k’s in 2017 ($18,000 each) for a total household contribution $36,000. Instead, they contribute $36,000 to traditional pre-tax 401k’s and in the same tax year convert $36,000 to a Roth 401k. The Traditional 401k contribution is pre-federal and state income tax. The Roth conversion causes additional federal income tax but avoids state income tax. Basically, the federal income tax offsets and ends up the same as if they had contributed directly to Roth. However, they save 6% in state income tax by taking the extra step thanks to the favorable Kentucky IRA tax laws. This saves them $2,160 of state income tax. Now we’re talking about a pretty serious benefit.

The net effect for Kentuckians is a 6% boost on Roth 401k contributions (3% for Illinois). This works especially well for those already planning to contribute to Roth 401k. However in reality, most people aren’t 100% certain that the Roth is better than simply going with the traditional 401k. There are several additional factors to consider as detailed in this article by Michael Kitces on making the Roth vs Traditional decisions. Also, there is also the fact that state income taxes are potentially deductible if you itemize deductions. If this is the case, the effect of this benefit will be reduced based on the tax savings of the deduction.

There’s also the step transaction doctrine to consider. This IRS catch-all rule says you cannot take multiple steps to circumvent the rules. This might be viewed as a violation under audit. Therefore, because of this and because in reality most people aren’t sure if the Roth is actually best (even with potential for up to 6% boost), an even better strategy would be to go ahead and contribute to the traditional 401k. Wait and see how the year shakes out. And decide on the Roth Conversion at the end of the year. Doing this actually gives you a much better idea of what your marginal tax bracket will be which factors heavily into the decision. This allows you to make the decision based on the maximum amount of information. It also lessens the chance of it being considered a violation of the step transaction doctrine.

As with any potentially taxable transaction, you should ultimately consult your tax advisor before moving forward.

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

PSLF Lawsuits and Why You Can’t Rely On Servicers for Good Student Loan Advice

PSLF Lawsuits and Why You Can’t Rely On Servicers for Good Student Loan Advice

October of 2017 will mark the first year for borrowers to become eligible for loan cancellation through the Public Service Loan Forgiveness (PSLF) program. This program promises tax-free forgiveness to borrowers who make 120 qualifying payments while working for certain employers — generally either for the government or a non-profit organization. Unfortunately, it is becoming clear that the number of those expecting forgiveness is much greater than those who will actually see their loans cancelled later this year.

As borrowers begin to apply for forgiveness, many are finding that they were never eligible, despite previously being approved by their loan servicers. Given the way various payment plans are structured, this means that many people will have a higher balance today than when they entered into repayment, with no relief in sight. As a result, many are filing suit against the Department of Education, as well as servicers like Navient who previously informed borrowers that they were approved. If their claims are accurate, this would understandably create some concern from those counting on their loans being forgiven.

Despite what many are considering a broken promise by the DoE, it appears as though those at the heart of the lawsuit weren’t ever eligible for forgiveness. In order to be eligible for PSLF, you must follow these three criteria:

  • Eligible Loans – Specifically, FFEL loans are not eligible
  • Eligible Repayment Plan – IBR, RePAYE, or PAYE are the most common. Graduated, or extended plans, while sometimes resembling income driven repayment plans, do not qualify.
  • Eligible Employer – generally a government or 501(c)(3) organization.

The biggest source of confusion seems to be the eligible employer criteria, as the tax-exempt status of many organizations can be confusing. In fact, the American Bar Association — which is one of the employers in question in the suit — is considered a 501(c), which can be confusing to even the most savvy of borrowers. If you are unsure of the tax exempt status of your employer, you can look it up online.

While being sure up-front about your eligibility for forgiveness is ideal, this situation also could have been prevented if the servicers hadn’t initially “approved” these borrowers. The key takeaway here is that the loan servicers do not work for the borrower – they work for the lender. As a result, they are not a viable option for seeking counsel on your loans. In fact, it may be the opposite, per Navient executive Jack Remondi — “There is no expectation that the servicer will act in the best interest of the consumer.

It is important to be fully aware of your options, as well as being confident that the one you have selected is best for you and your repayment strategy. If not done properly, it can cost you big time. And with many graduating medical students holding loans in excess of $300,000, it pays to be proactive.

If you have questions or would like to discuss your student loans, you can schedule a free consultation with us here. You might also find some valuable information in our Complete Guide to Student Loans.

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Student Loan Perks Designed to Recruit Physicians Can Actually Hurt Them

Student Loan Perks Designed to Recruit Physicians Can Actually Hurt Them

Many physicians entering practice today owe more than $200,000 on their federal student loans. It’s become a major priority to address these massive loans as they enter into practice.

As a result, hospitals are introducing physician loan repayment perks for new hires to drive recruitment. However, confusing intricacies with the new Public Service Loan Forgiveness program “PSLF” are causing major unintended consequences.

Here’s how the typical physician loan repayment perk goes:

Dr. Smith is finishing training and owes $400,000 on his student loans. He signs on with a hospital for three years of employment and, in exchange, the hospital will pay $75,000 toward his student loan balance. The hospital pays the $75,000 directly to the loan servicer in one, lump-sum payment (or sometimes spread out over three annual payments). If Dr. Smith breaks his contract early, he must repay some or all of the stipend.

At first glance, it’s a win win. The hospital wins by getting Dr. Smith to sign on. Dr. Smith wins by receiving help with his massive student loans.

PSLF Game-Changer

Public Service Loan Forgiveness “PSLF” totally changes the game. Physicians who have qualified loans and are employed (full-time) by a qualified employer and make 120 qualified payments can receive tax-free forgiveness of any remaining balance (after they successfully prove everything was “qualified”).

Qualified loans are federal direct student loans – these are by far the most common type of student loans young physicians take out for medical school. If they happen to be federal non-direct, there are methods to change them into direct to make them “qualified”.

Government, 501(c)3, AmeriCorps, Peace Corps and other qualifying public service employers are considered qualified employers. The majority of hospitals (and residency programs) in the US fall into this category.

A qualified payment is a successful payment made to any qualified loan under any of the income-driven repayment plans or the 10 year standard repayment plan while employed by a qualified employer. These income-driven payments are exactly what they sound like – payments set based on income. Lower income equals lower payments and under most plans, there is a payment cap.

Maneuvering PSLF

Any medical resident with any wherewithal will rack up low PSLF qualifying payments and set themselves up to receive massive PSLF benefits if they end up with a qualified employer. The value builds during residency and remains even if the new physician scores an extremely high-paying job. It’s not uncommon for us to see physicians making mid six-figure salaries on track to receive tax-free six-figure PSLF forgiveness.

PSLF makes student loans unlike any normal debt. With normal debts, the more you pay, the less you end up paying back. Extra payments to principal are great because you save interest. With PSLF, the less you pay, the less you end up paying back. All payments are equal for PSLF therefore, lower payments are always better for the borrower. The $0/mo qualifying payment has the same PSLF value as a $3,000/mo qualifying payment. Once you rack up 120 qualified payments, all remaining qualifying debt vanishes tax-free. The physician that ends up paying the lowest possible total 120 qualifying payments will maximize PSLF value. In most cases, additional payments to principal are worthless. Seems odd right? If you don’t believe me, check out the rules here.

Student Loan Perks for New Doctors

As 501(c)3 hospitals implement student loan repayment perks, they fail to consider the PSLF benefit. In the earlier example, Dr. Smith also happens to be on track for PSLF. In fact, he signed on with this hospital partly because they were a 501c3 so that he could continue qualifying for the program. He’s already satisfied 60 PSLF qualifying payments during residency and fellowship. Therefore, all he needs is 60 more payments to receive full forgiveness. Dr. Smith isn’t sure how the $75,000 will affect PSLF however he assumes it can’t hurt. As strange as it might seem, the $75,000 paid toward his student loans has no affect on PSLF except that it’s taxable income and therefore increases his total remaining payments by $7,500. It turns out he would have been better off receiving nothing. On top of this, Dr. Smith has to pay tax on the $75,000. IF we assume the tax is 40%, that’s $30,000.

In this case, Dr. Smith would have benefited $37,500 by declining the student loan perk. The hospital would have also saved $75,000. That’s $112,500 of missed opportunity.

PSLF Friendly Student Loan Perks

One solution would be for 501c3 hospitals to stop paying student loan stipends directly to servicers. Instead they could pay the borrower directly. However this would not incentivize physicians to maximize PSLF and it wouldn’t save the hospital any money.

To accomplish the desired outcome, 501(c)3 and government hospitals must restructure their student loan recruitment perks to consider PSLF. Because of it’s surprising complexity, it’s rare to see physicians maximizing the program.

A better solution would be for hospitals to use a small portion of their “student loan perk” funds to hire student loan consultants for their new physicians to help them navigate and maximize PSLF. Hospitals could then reimburse the physician for successful PSLF payments made. This would incentivize physicians to manage PSLF effectively and lower the hospital’s loan reimbursement payments. This would save the hospital money and help physicians eliminate their student loan burden faster.

PSLF has changed the game and hospitals must adapt if they want to attract and retain top physician talent. It’s only a matter of time before hospitals figure this stuff out and start offering new and improved recruitment incentives that help address the student loan problem. In the mean time, if you have a similar offer, it’s worth having a conversation with your employer about an alternative set-up that could ultimately save you thousands.

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

WFP’s Recommended Reads: December 2016

WFP’s Recommended Reads: December 2016

At the end of each month, we provide a list of finance-related articles to help keep you informed about the hot topics in finance. Here are some of the best articles we read in the month of December.

IRAs, RMDs, and the Crisis of Doctors with Too Much Money In Retirement(White Coat Investor).
Phil Demuth, PhD, explores the very real problem for physicians of having too much income in retirement as well as tax-planning strategies for how to most effectively prepare for it.

Ten News Stories that Offer Financial Lessons(Washington Post)
Everything from Prince’s death to the upcoming fiduciary rule. How ten of 2016’s biggest news stories taught us some very important lessons in finance.

20 Rules of Personal Finance(A Wealth of Common Sense)
A great list of rules to always keep in mind regarding your own personal finances. Everything from understanding the difference between salary and savings, to handling major purchases.

Diversification is No Fun(A Wealth of Common Sense)
The cyclical nature of the financial markets is perhaps their single most reliable aspect. For this reason, a truly diversified portfolio will always perform “worse” than the current cycles’ best performing asset class. It is important not to chase after the big performers, as these cycles will inevitably reverse.

Is Early Retirement Great? For Some, It’s Hard Work To Have Fun(New York Times)
Far too many people are counting down the days until they can retire from their careers. This article addresses the importance of life after retirement, and how it’s perhaps more important to retire to something, not just from something.

Tips for Understanding How Doctors Are Paid(Medical Economics)
Great read for doctors new to their careers, or unfamiliar with how exactly they are compensated. This article dives into the structure of compensation agreements and RVU’s and how to best inform yourself so that you can avoid making any costly mistakes with your next practice.

All Indexes Are Not Created Equal(Irrelevant Investor)
How is it that some indexes outperform others within the same asset class? Despite tracking similar indexes, not all funds maintain the same weighting across sectors. It is important to understand that one year’s performance in similar funds does not provide sufficient evidence as to which is superior. As with any investment, we should evaluate based on long-term performance.

What History Tells Us About Your Investments in 2017(Washington Post)
As we move into 2017, there are many prevailing narratives for what to expect in the coming year. This article provides some historical perspective for what we can expect as we enter the year under a new president, as well as a period of rising interest rates, among others.

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2018 © Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of CO, IN, KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.